On July 1, 2020, the Indian Railways launched the formal process of inviting private parties to run trains on the Indian railway system. Bids were finally opened last month. Hopes of a large participation were belied as there were no bids for nine clusters and only two bids for three clusters. Even for these three clusters, the only serious bid was by Indian Railways’ (IR) own company IRCTC, which in effect negated the basic objectives of bringing in private capital.
What are the reasons for this failure?
It is an outcome of the lack of alignment of the interests of IR and the concessioners. IR wants the capital and technology without giving up control, while the concessioner wants a far more equal relationship to be moderated by a regulator.
IR has imposed constraints that prevent efficient decisions and adopted an organisational design that does not take into account the characteristics and associated risks that will determine outcomes and investment decisions.
What are these risks and constraints?
Train sets have to be purchased without really knowing how much traffic the service will be able to attract in the face of rising competition from airlines.
IR does not guarantee the investor that, in case the concession fails, it will acquire the train sets.
The other big dampener is the absence of a regulator for resolving disputes.
The proposed independent engineer is far from satisfactory.
But suffice to say that the current model of inviting private players to run trains has failed. To take forward the initiative, a new model based on a new strategy is required.
The central issue is how to align the interests:
India’s need to be capable of designing and manufacturing state-of-the-art rolling stock, IR’s need for private capital participation and private capital’s necessity of earning a profit.
They can be aligned provided the lumpiness of investment in train sets can be eliminated by establishing a company that leases rolling stock not only to concessioners but also to IR. This will also enable reducing the concession period from 35 years to a more reasonable 10-15 years, bringing in competition.
The rolling stock company, apart from leasing train sets, can also be the window for bringing in new technology, preferably by purchasing from those who manufacture in India in collaboration with one of IR’s production units and are willing to transfer the technology.
This will require IR to guarantee a minimum offtake, say for a period of 10 years, to the manufacturer. For starters, IRFC, which is already into leasing rolling stock, can be that company.
A word about bringing in new technology. It is essential that the opportunity opened up by inviting private players is used to move the rolling stock industry up the industrial value chain and bring about a structural change of the Indian economy.
This can only be brought about by a vision that encourages long-term arrangements with rolling stock suppliers. An arrangement that gives access to IR’s rolling stock market is the only way to compel global players to share technology and form joint ventures with Indian companies.
However, technology transfer is not simply a matter of manufacturing in India. It requires understanding the critical elements of the technology and absorbing them into the design-production process.
This calls for the investment of large sums of money and the involvement of universities, research institutes and national laboratories. For example, for developing high-speed train technology, the Chinese involved 25 national first-class key universities, 11 first-class research institutes, and 51 national-level laboratories for research, development and production. India will also need to do something similar.
As far as drawing private players is concerned, all that is required is to reduce the risks for the concessioners, reduce the period of the concession to around 15 years, establish a regulator and moderate charges like the amount for the maintenance of tracks and stations.
With these changes, the plan may still take off. However, the initiative will remain limited to just running trains if there is no long-term vision.